Congress Plans Market for Trading Small Business Loans

John H. Cushman, Jr., THE JOURNAL RECORD

N.Y. Times News Service

WASHINGTON _ Lawmakers in the House and the Senate are mapping
out divergent paths to a common objective: creating a secondary
market in which small business loans can be bought and sold in
much the same fashion that mortgage-backed securities are
traded.

Advocates of a secondary market for small business borrowings
say it could unleash a flood of investment capital that would
wash away the biggest obstacle facing many small companies: a
lack of credit.

The point of creating a secondary market is this: The bank
that makes the loan to a small business will have a way to sell
that loan, at a profit, to investors around the country. And the
cash that the bank gets from the loan will enable it to make
additional loans. So the secondary market is, in effect, a way to
bring more people into the business of lending to small
businesses and, at the same time, spread the risk of these
loans.

But there is a fundamental difference between the approaches
being offered by two New Yorkers, Rep. John J. LaFalce, an
upstate Democrat, and the state's Republican senator, Alfonse M.
D'Amato. The House proposal would establish a government agency
to sponsor the transactions, while the Senate bill would just
clear away some of the legal underbrush and let private business
and finance manage the market.

Some bankers oppose the LaFalce bill, which would set up a
Venture Enhancement and Loan Development Administration for
Small, Undercapitalized Enterprises. The elaborate name was
devised to produce the acronym Velda Sue, which would join a
family tree of nicknamed Federal loan backers, like Fannie Mae,
Freddie Mac, Ginnie Mae, Sallie Mae and Farmer Mac. The
Independent Bankers Association of America contends that
government subsidies, even implicit ones, would undercut banks
making traditional loans.

There are doubters of the D'Amato approach, too, including the
North American Securities Administrators Association, a body of
state regulators. In the association's view, the Senate proposal
would not go far enough to standardize commercial loans before
allowing investors to buy and trade them, and the resulting
market would not be regulated enough.

Still, proponents of a secondary market say that whatever
approach is adopted, it would carry enormous potential.

Marianne K. Smythe, director of the division of investment
management at the Securities and Exchange Commission, said the
commission had not endorsed a particular approach but thought
that creating a secondary market was "probably the best _ and
quite possibly the only _ technique for really ending the credit
crunch that has afflicted small business across the country."

The SEC has already freed some commercial lenders to package
and resell certain loans, exempting them from some securities
laws' provisions.

Already, the first such offering is being shaped. A thick
prospectus now sitting on the SEC shelves describes a share
offering of the Fremont Small Business Loan Master Trust. What
investors would be buying are shares in a pool of commercial
loans made by a big lender, Fremont Financial Corp. …

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